While COVID-19 cases have been slowing down in the US as of late, infections have started to rise again in a number of European countries with the advent of the summer travelling season (see COVID-19 Update – Europe is postponing further reopening, 6 August). For the most part, it is still too early to call these second waves as seen in the US in July. However, the latest high frequency data readings suggest the positive development in activity seems to have plateaued amid new virus fears (see High Frequency Activity Tracker – Activity has plateaued amid new virus concerns, 5 August). So far, much of Europe still seems to be ahead of the US in the normalisation process (see Euro Area Macro Monitor – Change of fortunes, 5 August), with retail sales surprising on the upside at 1.3% y/y in June and German capital goods orders staging a decent rebound. US data on the other hand remain more mixed. While non-manufacturing ISM also surprised on the upside with a reading of 58.1 in July, the clouds in the US labour market seem to be gathering, with ADP private sector employment up a mere 167,000 in July, well below the 1.2m new jobs expected. The latter is especially worrying, as some 29m Americans are still claiming unemployment benefit and progress on the extension of higher unemployment benefit remains slow. At a press conference, President Donald Trump reiterated that he was considering executive action on jobless aid, a suspension of payroll tax and a partial moratorium on evictions, if no deal was reached.

The rift between the US and China on the technology front has also become wider, with the US seeking to ban Chinese video-sharing service TikTok unless it sells its US operations to an American company and US Secretary of State Mike Pompeo urged American companies such as Google and Apple to remove Chinese applications from its app stores. In our view, it is increasingly likely that the two countries are heading for a new cold war (see Research China: At the foothills of a new cold war – and what it implies, 31 July). A meeting planned for 15 August on the phase 1 deal could also produce more adverse headlines, as we expect China to have a hard time living up to the conditions of the deal in the current circumstances.

Risk sentiment remained broadly immune to these risks, with a better-than-expected Q2 earnings season and EUR/USD again edging closer to the 1.20 level, on the back of broad USD weakening, boosting equity markets. Brent oil broke above USD46/bbl, the highest level since March, on the back of a lower USD and Middle East supply concerns. Industrial metals have recovered to pre-corona levels in a sign that global manufacturing is recovering, while gold broke above USD2,000/oz. The spread between Italy and Germany’s government bond yields is again close to pre-corona levels following the deal on the EU recovery fund and ongoing ECB purchases. US 10Y treasury yields fell to 0.504%, the lowest level ever, as market expectations of the Fed keeping rates low ‘for ever’ and rapidly falling rates volatility added to treasury demand. As expected, the Bank of England did not increase its asset purchases and seems to have concluded that negative rates are not the solution to the UK’s COVID-19 woes.

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In light of the aforementioned headwinds, it will be interesting to see whether markets keep their nerve next week. In particular, news on a new US stimulus bill will be key for risk sentiment. Triggers on the macro data front are scarcer, with July CPI data released in a range of Scandinavian countries, while US July retail sales are likely to confirm a setback in the private consumption rebound. More interesting could be how consumer sentiment has developed in August, as US infections seem to have peaked.

Full report in PDF.


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